A decision by the U.S. Supreme Court found that the portion of a damages award attributable to lost wages for a workplace injury is considered to be taxable compensation under the Railroad Retirement Tax Act (RRTA). The decision in BNSF Railway Co. v. Loos (No. 17-1042) was released March 4.
Michael Loos pursued a claim against his then-employer, BNSF, for a workplace injury under the Federal Employers’ Liability Act (FELA), a law allowing railroad workers to file suit against their employers for on-the-job injuries. Loos was awarded damages of $126,212, of which $30,000 was attributable to lost wages from BNSF. BNSF indicated that it would withhold railroad retirement taxes from the lost wages portion of the award. Loos disagreed with this theory of withholding, arguing that, consistent with the RRTA’s definition of compensation, the payment must be “for services rendered” in order to be taxable and instead of compensation for services rendered the payment at issue compensated for an injury.
The issue worked its way from the lower courts to the Supreme Court. Oral arguments took place on November 6, 2018, and the court reached its decision on a 7-2 vote. In reversing the decision of the Circuit Court of Appeals for the Eighth Circuit, the Supreme Court held that the RRTA’s definition of compensation includes not simply pay for active service, but also “pay for periods of absence from active service provided there is an employer-employee relationship.” Whether the employer chooses to make the payment through a voluntary settlement or is involuntarily made to do so through an award of damages is immaterial so long as the payment for lost wages is provided based on the recipient’s status as a service-rendering employee.
The Internal Revenue Service administers the RRTA and, therefore, is the official source for Railroad Retirement tax information.
However, for purposes only of illustrating the court’s decision, the following example is provided.
In 2019, railroad employers and employees are subject to a Railroad Retirement tier I payroll tax of 7.65 percent (6.20 percent on earnings up to $132,900 for retirement, and 1.45 percent on all earnings for Medicare hospital insurance) and a tier II tax of 13.1 percent and 4.9 percent, respectively, on earnings up to $98,700. (An additional 0.9 percent in hospital insurance taxes, 2.35 percent in total, applies to an individual’s income exceeding $200,000, or $250,000 for a married couple filing a joint tax return).
If a railroad employee with no other earnings in 2019 is awarded $550,000 due to an on-the-job injury, of which $200,000 is attributable to lost wages (both past and future), the employer and employee would be required to pay $11,139.80 in tier I taxes ($8,239.80 retirement and $2,900 Medicare) and $12,929.70 and $4,836.30, respectively, in tier II taxes. (The additional Medicare tax would not apply as the award for lost wages did not exceed $200,000).
The amounts of compensation subject to railroad retirement tier I and tier II payroll taxes will increase in 2019, while the tax rates on employers and employees will stay the same. In addition, unemployment insurance contribution rates paid by railroad employers will continue to include a surcharge of 1.5 percent.
Tier I and Medicare Tax–The railroad retirement tier I payroll tax rate on covered rail employers and employees for 2019 remains at 7.65 percent. The railroad retirement tier I tax rate is the same as the social security tax, and for withholding and reporting purposes is divided into 6.20 percent for retirement and 1.45 percent for Medicare hospital insurance. The maximum amount of an employee’s earnings subject to the 6.20 percent rate increases from $128,400 to $132,900 in 2019, with no maximum on earnings subject to the 1.45 percent Medicare rate.
An additional Medicare payroll tax of 0.9 percent applies to an individual’s income exceeding $200,000, or $250,000 for a married couple filing a joint tax return. While employers will begin withholding the additional Medicare tax as soon as an individual’s wages exceed the $200,000 threshold, the final amount owed or refunded will be calculated as part of the individual’s Federal income tax return.
Tier II Tax–The railroad retirement tier II tax rates in 2019 will remain at 4.9 percent for employees and 13.1 percent for employers. The maximum amount of earnings subject to railroad retirement tier II taxes in 2019 will increase from $95,400 to $98,700. Tier II tax rates are based on an average account benefits ratio reflecting railroad retirement fund levels. Depending on this ratio, the tier II tax rate for employees can be between 0 percent and 4.9 percent, while the tier II rate for employers can range between 8.2 percent and 22.1 percent.
Unemployment Insurance Contributions–Employers, but not employees, pay railroad unemployment insurance contributions, which are experience-rated by employer. The Railroad Unemployment Insurance Act (RUIA) also provides for a surcharge in the event the Railroad Unemployment Insurance Account balance falls below an indexed threshold amount. The accrual balance of the Railroad Unemployment Insurance Account was $118.1 million on June 30, 2018. Since the balance is less than the indexed threshold of $150.1 million, a 1.5 percent surcharge will be added to the basic contribution rates for 2019, but will not increase the maximum 12 percent rate. There was also a surcharge of 1.5 percent the previous four years, with no surcharge in 2013 and 2014.
As a result, the unemployment insurance contribution rates (including the 1.5 percent surcharge) on railroad employers in 2019 will range from the minimum rate of 2.15 percent to the maximum of 12 percent on monthly compensation up to $1,605, an increase from $1,560 in 2018.
In 2019, the minimum rate of 2.15 percent will apply to 81 percent of covered employers, with 7 percent paying the maximum rate of 12 percent. New employers will pay an unemployment insurance contribution rate of 2.75 percent, which represents the average rate paid by all employers in the period 2015-2017.